It is Time to Scale Back Trade with China

The Financial Times explains why the West should take a close look at its trading relationship with China. Free trade tends to be a net positive over the long-run when both parties play by the same rules, and both parties run free-market economies. Does China play by the same rules? Does China run a free-market economy? As the FT explains in detail here the answer to both questions is a resounding no. China is in fact moving further away from a free-market system.

At the Chinese Communist party plenum three years ago, party leaders pledged to support private entrepreneurs and break down the barriers for them. They, too, would have access to credit, Beijing promised — though maybe not at quite the bargain rates of the state-owned enterprises — in a part of the world where resource allocation had historically discriminated against them.

They were vital, after all, to help China’s shift from export-led manufacturing to an economy that was powered by consumption and services such as healthcare, media and entertainment. But the much-heralded blooming of the private sector flower has yet to happen, argue some observers.

This year, the message from the party plenum was that the state sector remains “core” — right up there with President Xi Jinping — as a far more reliable instrument of the state than privately owned enterprises will be any time soon, according to Professor Chen Zhiwu, of Yale University’s School of Management.

While it may be too soon to conclude that economic reform is dead, analysts say efforts have been scaled back to essentially mean a reduction in overcapacity rather than promoting private enterprise.

What the International Institute of Finance refers to as “the tension between the desire to increase the role of the market in the allocation of resources and preserving the role of the state enterprises in strategic parts of the economy” seems to have been resolved in favour of the latter.

“The timing of broader reforms to bolster the role of the private sector remains unclear,” it adds. If that is indeed true, the case for investor optimism when it comes to China has only become weaker. The state sector continues to underperform and remains less profitable than private enterprise despite official support.

More than 30 per cent of state enterprises lose money while the comparable figure for their private peers is less than 10 per cent.

Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.